It has now been twenty years since the European Court of Justice delivered its landmark Centros decision, followed by a string of cases similarly supportive of corporate mobility. In theory, these cases have created significant opportunities for EU companies to engage in regulatory arbitrage and choose the company law rules that best suit them. This could well have kicked off Europe-wide regulatory competition in corporate law. In practice, however, the European corporate landscape today differs little from that of the 1990s. The vast majority of companies are still governed by the corporate law of the Member State in which they happen to have their headquarters. Both regulatory arbitrage by entrepreneurs and competitive law-making by Member States has largely been confined to areas of relevance only to small (or indeed micro‑) companies.
Fears of, or hopes for, the emergence of a European Delaware have thus been shown to be almost entirely unfounded, with corporate mobility and regulatory competition in EU company law—for better or worse—never having reached a point warranting comparisons to the experience in the United States. From this perspective, the effect of Centros on company law and company law-making in Europe was ultimately very modest.
Of course, the economic incentives for regulatory competition are very different in Europe than in the US, and many other cultural and linguistic barriers exist in the EU that are absent in the US. While we acknowledge that such factors likely explain part of the differences between Europe and the US, our article (forthcoming in European Business Organization Law Review (EBOR)), argues that they are not the whole story. Instead, we argue that the interplay between supranational EU law and national law, in particular an idiosyncratic combination of primary EU law, conflict of laws rules, and national corporate, insolvency, tort law and other legal areas, played an important role in creating the generally muted response to Centros by both companies and Member States.
Centros confirmed that Member States are required under EU law to accept foreign-incorporated EU companies to enter their territory, including by moving or establishing their real seat or headquarters, or in fact all of their economic activities, there. Such companies bring with them their own foreign corporate law, the applicability of which cannot be questioned by the host Member State by virtue of their right of establishment under the EU Treaty. A conflict of laws rule of the host state that provided, for example, that the law at the place of the real seat should govern a company even where it was incorporated in another EU Member State, accordingly, would constitute a restriction on the right of establishment. Thus, as regards company law that is applicable to a company operating in one Member State (the host state) and incorporated in another (the home state), the legal situation is clear: the host state generally cannot impose its own laws on the company (unless this can be justified in line with very stringent criteria unlikely to be met in the relevant circumstances). Companies, however, are affected by a wide range of legal rules beyond the narrow ‘core’ company law rules addressed in the Centros jurisprudence. As we demonstrate in our article, the extent to which regulatory arbitrage is available in relation to these is much harder to determine.
Host states retain regulatory authority under three conditions: First, the rules in question are not ‘company law’ for purposes of private international law; secondly, the relevant conflict of laws rule that decides on the international scope of application of the issue in question (say, liability of directors) is based on a connecting factor that cannot be manipulated as easily as the registered seat, with the consequence that companies cannot costlessly, or near-costlessly, opt into and out of the applicable law; and thirdly, a conflict of laws rule that leads to the application of host state law in addition to the applicable home state company law, as well as the rules of internal host state law thus governing corporate activities, are in compliance with the right of establishment.
We address these three points in our article, finding that large sections of a company’s outward-facing activities, as opposed to its internal affairs, fall outside the scope of ‘company law’ as understood in European private international law, and hence outside the area reserved for the state of incorporation. Furthermore, these activities are typically governed by rules whose applicability derives from the location of (aspects of) the company’s actual business operations in a Member State, such as a company’s centre of main interest (COMI). An exampleare actions of directors of a company that compromise the interests of creditors, notably the decision to continue to trade at a time when the company should have been put into insolvent liquidation. Legal mechanisms that penalise directors for continuing to trade (wrongful trading, liability for failure to file, and similar mechanisms) do not fall within the lex societatis, but the lex concursus (the law at the place of the COMI) if they (i) derogate from the common rules of civil and commercial law, (ii) protect the interests of the general body of creditors (as opposed to individual creditors), and (iii) an action is brought by the liquidator in the case at hand (even if the involvement of the liquidator is not mandatory). Similarly, an action that would satisfy these three conditions had it been brought by a liquidator, for example liability of a director for entering into obligations that the director knows the company will not be able to perform, but that is brought by a creditor, is not governed by the lex societatis, but by the lex loci delicti.
It is unclear whether this far-reaching deferral to the host state in cases where companies make use of their right of establishment by incorporating in a Member State other than the state where most of their operations are located, complies with the Treaty provisions on right of establishment. It is obvious that the cumulative application of two or more legal systems to the activities of a company will generally amount to a restriction of the right of establishment as defined by the Court of Justice, for example in Inspire Art, where the Court held that a measure of national law that is ‘liable to hinder or make less attractive’ the exercise of the Treaty freedom must be justified by imperative requirements in the public interest (Gebhard justification). The only decision of the Court of Justice that addresses the meaning of a restriction in the present context at any length is Case C-594/14 Simona Kornhaas v Thomas Dithmar. In this case, the Court held that the provision of German law at issue in the proceedings did not constitute a restriction on the freedom of establishment because it concerned
in no way . . . the formation of a company in a given Member State or its subsequent establishment in another Member State, to the extent that [it] . . . is applicable only after that company has been formed, in connection with its business, and more specifically, either from the time when it must be considered, pursuant to the national law applicable under Article 4 of Regulation No 1346/2000 [now Article 7 Insolvency Regulation 2015], to be insolvent, or from the time when its over-[in]debtedness is recognised in accordance with that national law.
This sentence does not stand out as an example of clarity. The Court seems to introduce the vicinity of insolvency as a dividing line between measures falling within the scope of the Treaty and measures no longer covered by the right of establishment. We suggest that the ruling can be understood more precisely as removing measures characterised as insolvency law pursuant to the Insolvency Regulation from the scope of the right of establishment, thus synchronising the latter with the international scope of application of the Insolvency Regulation. This approach promotes legal certainty, since the international reach of the Insolvency Regulation is now relatively well defined, given the rich body of case law by the Court of Justice that exists on the question, whereas the term ‘vicinity of insolvency’ is not a well-established concept of EU law and would require further litigation in order to take on a precise meaning. It is also in line with Kornhaas (see ft. 5), since the Court, in discussing which measures are excluded from the scope of the right of establishment, refers to companies that ‘must be considered, pursuant to the national law applicable under Article 4 of Regulation No 1346/2000 [Article 7 Insolvency Regulation 2015, to be insolvent, or [whose over-indebtedness] is recognised in accordance with that national law’.
Conceptually, this approach can be understood as the apportionment of spheres of legislative or regulatory authority by the supranational legislator: for some matters (those falling within Article 7 Insolvency Regulation) to the Member State where the COMI is located, and for others to the Member State where the registered office is located. Freedom of establishment must respect this apportionment of spheres of regulatory authority, since the allocation of rule-making power to the state of the COMI for measures characterised as insolvency law would be largely neutralised if these measures had to be justified under Gebhard. To put the same point slightly differently, it could be argued that the conflict rules assign home state status to Member States for different regulatory spheres. As far as insolvency law (as defined in Article 7 Insolvency Regulation) is concerned, the Member State of the COMI is home Member State, and as far as company law is concerned, the Member State of the registered office is the home state.
If this interpretation is accepted, the question arises whether Kornhaas can be generalised, in the sense that uniform conflict rules generally have the function of allocating regulatory spheres for purposes of determining the scope of freedom of establishment, or Kornhaas is limited to the interaction between freedom of establishment and insolvency law. Notwithstanding the answer to this question, the interpretation of Kornhaas that we suggest in our article has important implications for the interdependence of uniform conflict rules and freedom of establishment, as well as the applicability of Gebhard justification. It is clear that EU regulations harmonising conflict rules, as all other acts by the EU institutions or Member States, have to comply with the Treaty and, therefore, need to be justified if they amount to a restriction of a fundamental freedom. Given the wide formulation of what constitutes a restriction, it can be argued that all conflict rules that rely on a different connecting factor than the registered office and, accordingly, introduce regulatory requirements that apply in addition to a foreign lex societatis to companies established in another Member State render the exercise of the right of establishment less attractive and must pass the Gebhard test. However, the proportionality test that is part of Gebhard justification is applied less intensively if EU institutions make discretionary policy choices involving complex political, economic and social considerations, as will generally be the case when they make use of their legislative powers under the Treaty. In such cases, EU courts will only invalidate a legislative or administrative measure if it is manifestly inappropriate or manifestly disproportionate, considering the objective pursued by the measure. In addition, as stated above, uniform conflict rules can be understood as apportioning spheres of legislative or regulatory authority by decision of a supranational rule-maker. Therefore, if a uniform conflict rule is justified under Gebhard, this may be held to apply also to rule-making activity by a national legislator that falls within the confines of the conflict rule. Such rule-making activity, it could be said, requires no further Gebhard justification, since it is pursued within a ‘regulatory sphere’ that has been allocated by the EU legislator in compliance with the Treaty.
If our approach is correct, it would result in a layered review of provisions that have the potential to dissuade parties from exercising their right of establishment. First, provisions of national law adopted pursuant to a uniform conflicts rule that allocates regulatory authority to the respective Member State in compliance with the Treaty would not require justification (this is the Kornhaas scenario). Secondly, uniform conflict rules laid down in measures of EU law require justification, but with ‘low intensity review’ based on the criteria of manifest inappropriateness or disproportionality. Thirdly, host state law that operates independently of uniform conflict rules is subject to full Gebhard review.
 These three conditions can be derived from Case 133/78 Henri Gourdain v Franz Nadler  ECR 733, dealing with the French action en comblement de passif (liability of a director or de facto director who committed a ‘management fault’ that contributed to a shortfall in the company’s assets), Art 99 of the Bankruptcy Code of 1967, now laid down in Art L651-2 of the French Commercial Code as action en responsabilité pour insufissance d’actif. The Gourdain v Nadler conditions have been amplified in numerous cases, recently including Case C-295/13 H v HK  OJC 46/9; Case C-594/14 Kornhaas  OJC 48/5; Case C-296/17 Wiemer & Trachte GmbH v Zhan Oved Tadzher  OJC 16/14; Case C–535/17 NK v BNP Paribas Fortis NV  ECR.
 This question was implicitly addressed in C-147/12 ÖFAB v Frank Koot  OJC 260/14.
  OJC 48/5.
 Limited Liability Companies Act, s 64.
 Kornhaas (n 1) para 28.
 ibid (emphasis added).
 See, for example, Case C-491/01 The Queen v Secretary of State for Health, ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd  ECR I-11453, para 123.
Carsten Gerner-Beuerle is a Professor of Commercial Law at UCL.
Federico M. Mucciarelli is an Associate Professor of Business Law at the University of Modena and Reggio Emilia and a Reader in Financial Law at the SOAS University of London.
Edmund Schuster is an Associate Professor of Law at the LSE.
Mathias Siems is a Professor for Private Law and Market Regulation at the EUI and Professor of Commercial Law at Durham University (on leave).